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Scotiabank’s annual Meet the REITs conference was held this week, with management from 26 major companies participating. Analyst Mario Saric summarized some interesting observations from the festivities in a Friday research report.

Mr. Saric opened with his belief that 2024 can be a strong year for REIT returns while also warning some investor patience might be needed first. He then noted a general trend of management focus on transforming operating income into cash flow in terms of funds from operations per unit (FFOPU), which was hardly a shocking revelation.

The renewed investor emphasis on sector growth rather than valuations was much more of a surprise. Mr. Saric writes, “history suggests Value should be bought, but we think Growth should still lead the recovery.”

In the past, the best returns in the sector were often generated by owning the cheapest REITs according to net asset value per unit, or P/NAVPU. Now, however, investors have less faith in the profitability assumptions (income compared with debt costs) embedded in the NAVPU calculations. According to Mr. Saric, investors are now much more focused on FFOPU growth.

Scotiabank believes the REITs that have lagged year to date and that are also forecasting accelerating cash flow are set to outperform. Examples include Interrent REIT (IIP-UN-T), Storagevault Canada Inc. (SVI-T), and to a lesser extent Tricon Capital Group (TCN-T), Crombie REIT (CRR-UN-T) and Allied Properties REIT (AP-UN-T).

Mr. Saric’s longer-standing recommendations remain intact. His top picks for growth, in addition to Storagevault, Interrent and Tricon, are Brookfield Asset Management (BAM-T), and Granite REIT (GRT-UN-T). For value, he likes Allied Properties, Brookfield Corp. (BN-T), Canadian Apartment Properties REIT (CAR-UN-T), Chartwell Retirement Residences (CSH-UN-T), Dream Industrial REIT (DIR-UN-T), Flagship Communities REIT (MHC-U-T) and Riocan REIT (REI-UN-T). Top picks for income are Choice Properties REIT (CHP-UN-T), Crombie REIT and CT REIT (CRT-UN-T).

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Canadian oil and gas stocks soar but remain a tough sell for investors

On numbers alone, oil and gas stocks are hard to argue against right now. Crude prices have topped US$90, global supply is tight, demand is strong and years of debt reduction and cost cutting at the company level has the oil patch generating plenty of cash. The stocks themselves are hot – up more than 20 per cent in the past three months on the TSX. But Canadian oil and gas remains a tough sell for investors, big and small. For most of the past year, they have been pulling money out of Canadian energy ETFs, with August seeing a record monthly outflow of more than $500-million. Tim Shufelt explains why.

Also see: U.S. crude oil prices surge as stocks drain away from Cushing

SoftBank’s Arm soars in market debut, signalling new rush to launch IPOs

Shares in SoftBank’s Arm Holdings soared in their Nasdaq debut on Thursday, valuing the British chip designer at more than US$60 billion in its return to the public markets after seven years. As Reuters reports, the first-day jump bodes well for companies that have been waiting to list after the IPO market collapsed due to the war in Ukraine and Federal Reserve interest rate hikes. Meanwhile, Canada’s main stock exchange operator TMX Group is urging companies seeking to list on its platform to accelerate their plans.

Also see: Arm’s shares seen as a shoo-in for Nasdaq 100, though S&P 500 unlikely

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: Eight dividend-paying chip makers for 5G smartphones

Number Cruncher: Thirteen balanced funds to reduce home-country bias

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Monica Rizk: Bullish on Lowe’s Companies

Globe Advisor

The hotel stock this money manager is betting on for long-term growth

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Ask Globe Investor

Question: I was wondering about the risk of price declines for high interest savings accounts ETFs. Right now, the price of one share is fairly stable – like, for instance, at $50. Can you share your thoughts on that?

Answer: The custom with HISA ETFs is for the price to be pegged at a base of $50 per unit. The unit price will rise mildly as interest accumulates through a month, then decline back to $50 when interest is paid to unitholders

Raj Lala, president and CEO of Evolve ETFs, said the price of a HISA ETF should not fall below $50. “The only risk of it dipping below $50 is if the Bank of Canada overnight rate becomes negative, or one of the Big Six banks becomes insolvent…obviously, very unlikely outcomes,” he said in an e-mail.

Changes in HISA ETF returns track the overnight rate, which has jumped to 5 per cent from 0.25 per cent in early 2022. The big risk with these ETFs is a sharp decline in rates and, in turn, interest payouts. A 5 per cent return with minimal danger of losing money looks darn good. But if that return falls to, say, 2 to 3 per cent, investors may find themselves losing out on potentially much better stock market returns.

One more risk to be aware of with HISA ETFs is an ongoing regulatory review of how their deposits at banks are accounted for. The Office of the Superintendent of Financial Institutions is expected to announce a decision next month. If accounting changes are required, expect payouts to fall by an estimated 0.5 of a percentage point starting in January.

--Rob Carrick

What’s up in the days ahead

Shares in Cameco are surging as uranium prices hit new highs and governments around the world warm to nuclear. We’ll take a closer look.

A central bank bonanza: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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